De-dollarisation? Currency systems ‘reflect’ power relations, imperial monopoly control

By Justin Podur* 
De-dollarization is apparently here, “like it or not,” as a May 2023 video by the Quincy Institute for Responsible Statecraft, a peace-oriented think tank based in Washington, DC, states. Quincy is not alone in discussing de-dollarization: political economists Radhika Desai and Michael Hudson outlined its mechanics across four shows between February and April 2023 in their fortnightly YouTube programme, Geopolitical Economy Hour.
Economist Richard Wolff provided a nine-minute explanation on this topic on the Democracy at Work channel. On the other side, media outlets like Business Insider have assured readers that dollar dominance isn’t going anywhere. Journalist Ben Norton reported on a two-hour, bipartisan Congressional hearing that took place on June 7 – Dollar Dominance: Preserving the US Dollar’s Status as the Global Reserve Currency – about defending the US currency from de-dollarization. During the hearing, Congress members expressed both optimism and anxiety about the future of the dollar’s supreme role. But what has prompted this debate?
Until recently, the global economy accepted the US dollar as the world’s reserve currency and the currency of international transactions. The central banks of Europe and Asia had an insatiable appetite for dollar-denominated US Treasury securities, which in turn bestowed on Washington the ability to spend money and finance its debt at will. Should any country step out of line politically or militarily, Washington could sanction it, excluding it from the rest of the world’s dollar-denominated system of global trade.
But for how long? After a summit meeting in March between Russia’s President Vladimir Putin and China’s President Xi Jinping, Putin stated, “We are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa, and Latin America.”
Putting that statement in perspective, CNN’s Fareed Zakaria said, “The world’s second-largest economy and its largest energy exporter are together actively trying to dent the dollar’s dominance as the anchor of the international financial system.” Already, Zakaria noted, Russia and China are holding less of their central bank reserves in dollars and settling most of their trade in yuan, while other countries sanctioned by the United States are turning to “barter trade” to avoid dependence on the dollar.
A new global monetary system, or at least one in which there is no near-universal reserve currency, would amount to a reshuffling of political, economic, and military power: a geopolitical reordering not seen since the end of the Cold War or even World War II.
But as a look at its origins and evolution makes clear, the notion of a standard global system of exchange is relatively recent and no hard-and-fast rules dictate how one is to be organized. Let’s take a brief tour through the tumultuous monetary history of global trade and then consider the factors that could trigger another stage in its evolution.

Imperial commodity money

Before the dollarization of the world economy took place, the international system had a gold standard anchored by the naval supremacy of the British Empire. But a currency system backed by gold, a mined commodity, had an inherent flaw: deflation. As long as metal mining could keep up with the pace of economic growth, the gold standard could work.
But, as Karl Polanyi noted in his 1944 book, “The Great Transformation”, “the amount of gold available may [only] be increased by a few percent over a year… not by as many dozen within a few weeks, as might be required to carry a sudden expansion of transactions. In the absence of token money, business would have to be either curtailed or carried on at very much lower prices, thus inducing a slump and creating unemployment.”
This deflationary spiral, borne by everyone in the economy, was what former US presidential candidate William Jennings Bryan described in his famous 1896 Democratic Party convention speech, in which he declared, “You shall not crucify mankind upon a cross of gold.” For the truly wealthy, of course, the gold standard was a good thing, since it protected their assets from inflation.
The alternative to the “cross of gold” was for governments to ensure that sufficient currency circulated to keep business going. For this purpose, they could produce, instead of commodity money of gold or silver, token or “fiat” money: paper currency issued at will by the state treasury. The trouble with token money, however, was that it could not circulate on foreign soil. How, then, in a global economy, would it be possible to conduct foreign trade in commodity money and domestic business in token money?
The Spanish and Portuguese empires had one solution to keep the flow of metals going: to commit genocide against the civilizations of the Americas, steal their gold and silver, and force the Indigenous peoples to work themselves to death in the mines.
The Dutch and then British empires got their hands on the same gold using a number of mechanisms, including the monopolization of the slave trade through the Assiento of 1713 and the theft of Indigenous lands in the United States and Canada. Stolen silver was used to purchase valuable trade goods in China. Britain stole that silver back from China after the Opium Wars, which China had to pay immense indemnities (in silver) for losing.
Once established as the global imperial manager, the British Empire insisted on the gold standard while putting India on a silver standard. In his 2022 PhD thesis, political economist Jayanth Jose Tharappel called this scheme “bimetallic apartheid”: Britain used the silver standard to acquire Indian commodities and the gold standard to trade with European countries.
India was then used as a money pump for British control of the global economy, squeezed as needed: India ran a trade surplus with the rest of the world but was meanwhile in a trade deficit with Britain, which charged its colony Home Charges for the privilege of being looted.
Britain also collected taxes and customs revenues in its colonies and semi-colonies, simply seizing commodity money and goods, which it resold at a profit, often to the point of famine and beyond – leading to tens of millions of deaths. The system of Council Bills was another clever scheme: paper money was sold by the British Crown to merchants for gold and silver.
Those merchants used the Council Bills to purchase Indian goods for resale. The Indians who ended up with the Council Bills would cash them in and get rupees (their own tax revenues) back. The upshot of all this activity was that the Britain drained $45 trillion from India between 1765 and 1938, according to research by economist Utsa Patnaik.

From gold to gold-backed currency to the floating dollar

As the 19th century wore on, an indirect result of Britain’s highly profitable management of its colonies – and particularly its too-easy dumping of its exports into their markets – was that it fell behind in advanced manufacturing and technology to Germany and the United States: countries into which it had poured investment wealth drained from India and China.
Germany’s superior industrial prowess and Russia’s departure from Britain’s side after the Bolshevik Revolution left the British facing a possible loss to Germany in World War I, despite Britain drawing more than 1 million people from the Indian subcontinent to serve (more than 2 million Indians would serve Britain in WWII) during the war. American financiers loaned Britain so much money that if it had lost WWI, US banks would have realized an immense loss.
When the war was over, to Britain’s surprise, the United States insisted on being paid back. Britain squeezed Germany for reparations to repay the US loans, and the world financial system broke down into “competitive devaluations, tariff wars, and international autarchy,” as Michael Hudson relates in his 1972 book, Super imperialism, setting the stage for World War II.
After that war, Washington insisted on an end to the sterling zone; the United States would no longer allow Britain to use India as its own private money pump. But John Maynard Keynes, who had written “Indian Currency and Finance” (1913), “The Economic Consequences of the Peace” (1919), and the “General Theory of Employment, Interest, and Money” (1936), believed he had found a new and better way to supply the commodity money needed for foreign trade and the token money required for domestic business, without crucifying anyone on a cross of gold.
At the international economic conference in 1944 at Bretton Woods, New Hampshire, Keynes proposed an international bank with a new reserve currency, the bancor, that would be used to settle trade imbalances between countries. If Mexico needed to sell oil and purchase automobiles from Germany, for instance, the two countries could carry out trade in bancors. If Mexico found itself owing more bancors than it held, or Germany had a growing surplus of them, an International Clearing Union would apply pressure to both sides: currency depreciation for debtors, but also currency appreciation and punitive interest payments for creditors.
Meanwhile, the central banks of both debtor and creditor nations could follow Keynes’s domestic advice and use their powers of money creation to stimulate the domestic economy as needed, within the limits of domestically available resources and labor power.
Keynes made his proposal, but the United States had a different plan. Instead of the bancor, the dollar, backed by gold held at Fort Knox, would be the new reserve currency and the medium of world trade. Having emerged from the war with its economy intact and most of the world’s gold, the United States led the Western war on communism in all its forms using weapons ranging from coups and assassinations to development aid and finance.
On the economic side, US tools…